The Securities and Exchange Board of India (Sebi) on Thursday changed regulations related to risk management for certain debt mutual funds. It also changed the way mutual fund products are labeled through two separate circulars on its website.
The regulator said that mutual funds will now be required to conduct a stress test of Liquid Funds and Money Market Mutual Fund Schemes at least once a month. The risk assessed should take into parameters such as interest rate risk, credit risk as well as liquidity and redemption risks.
"Further, in the event of stress test revealing any vulnerability or early warning signal, it would be required to bring it to the notice of the Trustees and take corrective action as deemed necessary, to reinforce their robustness. Each AMC should also be required to have documented guidelines, to deal with the adverse situation effectively," it said.
Mutual funds had faced issues in such cases during the financial crises in 2008 as well as during 2013 when the Reserve Bank of India unexpectedly tightened liquidity.
Every asset management company is required to have such a stress testing policy in place, added the circular.
The regulator also said that it has consulted with the mutual fund advisory committee on product labeling of mutual funds. Currently one of three colours are used to denote the risk involved in investing in a given scheme. The levels of risk have been expanded to five which will be denoted through a speedometer-like dial with five divisions for each level of risk.
"The depiction of risk using colour codes would be replaced by pictorial meter named "Riskometer" and this meter would appropriately depict the level of risk in any specific scheme," said the circular on the matter.
The product labeling circular is effective from July 1, 2015. It will apply to all existing and new schemes. The circular on stress testing of debt funds is applicable with immediate effect.
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